Investing your surplus cash in liquid funds is a much smarter option than having it lie idle in your savings bank account. Liquid fund are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits, commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. Liquid funds can give pre-tax returns of 9 – 10%, compared to the 4% interest paid by savings bank. Most liquid funds do not have any exit load. Even those funds that have exit load charge a nominal load for funds redeemed within a week or a month. Withdrawals from liquid funds are processed within 24 hours on business days. Some liquid funds also offer cash withdrawal facilities with ATM cards.
In selecting liquid funds, one must be careful and select top quality funds only. Return should not be the only consideration in selecting a liquid fund. Volatility is also a very important consideration, given the investment objective. The other important factors are liquidity and asset quality of the fund. Even though liquid funds invest in the same type of instruments, like treasury bills, certificate of deposits and commercial papers and term deposits, there is a significant difference in returns of top and bottom performers in liquid funds. The maximum one year trailing return given by a liquid fund is 10.1%, whereas the minimum one year trailing return is -2.2%. The chart below shows average 1 year returns of liquid funds in different performance quartiles.
There is significant difference, even in trailing 6 months returns of liquid funds in different performance quartiles.
While you should definitely avoid investing in funds in the bottom quartile, there are several other important considerations like volatility, liquidity, asset quality etc as discussed above. CRISIL ranks liquid funds based on such considerations.
CRISIL Liquid Funds Ranking Methodology
CRISIL ranks liquid funds based on several parameters such as:-
- Average returns
- AUM size
- Downside risk probability, measured as the probability of earning lower returns compared to short term risk free investments
- Asset quality (in terms of credit risk)
- Company concentration risk
- Liquidity risk
Top Liquid Funds
The table below shows the top liquid funds based on CRISIL’s most recent ranking, for the quarter ended June 30, 2014.
Liquid funds are excellent investment options for parking your short term funds. if retail investors are ready to put in a little bit of effort, they can earn higher returns by investing their surplus cash in liquid funds than having it lie idle in their savings bank account. As discussed in this article, top liquid funds have given over 9.5% returns, compared to the 4% interest paid by savings bank. However, given the short term nature of investment and the need of capital safety, it is imperative that investors select top quality funds only. Investors should consult with their financial advisors if these funds are suitable options for parking their surplus cash.